Advanced Strategic Management MBA

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Indira GandhiNational Open UniversitySchool of Management Studies

MS-91Advanced Strategic

Management

Block

1ISSUES IN CORPORATE MANAGEMENTUnit 1

Corporate Management: An Overview 5

Unit 2

Introduction to Corporate Strategy 18

Unit 3

Corporate Policy 30


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Indira Gandhi National Open UniversitySchool of Management Studies

MS91Advanced Strategic

Management

Issues in Corporate Management 1


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Issues in CorporateManagement

On the academic side, research on corporate management has not taken off in India.However, a few studies may be seen with respect to corporate planning.

1.2 NATURE AND SCOPE OF CORPORATEMANAGEMENT

For the sake of convenience, the concept of corporate management has moved throughfive paradigm shifts as narrated below:

Adhocism when the exigency used to force the managers to take appropriate actionto deal with situation. This continued till 1930.

Planned Policy the great depression forced the planners and thinkers to have aplanned policy. Unforeseen incidents and contingencies are to be anticipated.

Environment-Strategy Interface the strategy has to cope with environment. Theforces of internal and external environment have created uncertainties. In order tocope with such situation, appropriate strategies are being formulated keeping in mind

the competitive advantage.Corporate Planning involves moving ahead from environmental appraisal tostrategic alternatives and choice. The planning needs to be strategic.

Corporate Management aspects of implementation and control are also consideredin corporate planning process. It is a unified and integrated process to get best results.

Nature of Corporate Management

The following aspects are important in this regard:

i) It encompasses the entire management process.

ii) It is concerned with the choice of alternatives, determination of future course of action, mobilization of resources and deployment of resources for attainment of goals.

iii) It is both short term and long term.

iv) It is related to all levels of management. Strategic issues, however, are related totop management.

v) It includes the following phrases:

! Corporate Planning

! Implementation Issues in Corporate Plan! Evaluation and Control

vi) It is concerned with coping uncertain future with active intervention.

vii) It is based on various types of plan viz strategic plan, functional plan, operatingplan, organizational plan etc.

viii) It is all pervasive and integrative.

Scope of Corporate Management

The term corporate management is an extension of the term corporate planning andalso includes implementation and control aspects. More specifically, the scope of corporate management is spread over different areas. They are as follows :


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Corporate Management An Overview

i) Role of top management in corporate governance.

ii) Code of conduct including audit committee, governance committee, etc.

iii) Competitive scenario for domestic and global markets.

iv) Competitive scenario for dynamic and global markets.

v) Market structures and net work externalities.

vi) Strategic enablers like IT, R & D, knowledge management and innovations, etc.

vii) Corporate social responsibility including ethics, values and social audit.

viii) Philanthropy as a strategic choice.

Activity I

i) Discuss the nature of corporate management in Indian context.

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ii) Discuss the scope of corporate management.

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1.3 CORPORATE PLANNING

Corporate planning is a comprehensive planning process which involves continuedformulation of objectives and the guidance of affairs towards their attainment. It isundertaken by top management for the company as a whole on a continuous basis.

Druker defines corporate planning as a continuous process of makingentrepreneurial decisions systematically, and with the best possible knowledge of theirfuturity, organizing systematically the efforts needed to carry out these decisions, andmeasuring the results against expectations through organized systematic feedback.

This definition clearly emphasises the relation of corporate planning to strategy.

According to Hussey Corporate long range planning is not a technique, it is acomplete way of running a business. Corporate planning is a way of keeping thecompanys eyes open.

The following are the essentials of corporate planning.

i) Corporate planning deals with the future of current decisions.

ii) The process of corporate planning integrates strategic planning with short rangeoperational plans.

iii) A few authorities use comprehensive corporate planning, strategic planning, longrange planning, formal planning, corporate planning etc. as synonymous to eachother.


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iv) Corporate planning is viewed as an organizational process resulting indeveloping strategic intent and action plans to achieve the objectives.

The object of corporate planning is to identify new areas of investment andmarketing.

The purpose of corporate planning process is to formulate the organizations purpose,mission, objectives, goals, policies, programme strategies and major action plans toachieve its objectives.

The corporate planning process involves the following steps:

i) Formulation of strategic intent.

ii) Environmental appraisal

iii) Generation of strategic alternatives.

iv) Evaluation of alternatives.

v) Decisions in terms of strategy, policies and programmes.There are many advantages of corporate planning.

The following are the benefits of corporate planning:

i) It ensures a rational allocation of resources and improves coordination betweenvarious units or divisions.

ii) With corporate planning, significant improvement in performance is reflected. InUS, the percentage improvement in performance was 30-40 percent.

iii) A formal planning system can help the management in responding to a dynamic

environment and in managing a strategically complex organization with limitedresources.

iv) With corporate planning, a sense of making a systematic and critical review of business is developed.

v) This develops a visionary approach . A habit of forward thinking is encouragedin forward planning.

In India the organizations corporate planning process could not succeed.

The following can be the reasons attributed to the failure of corporate planning inIndian organizations:

i) Failure to keep the corporate planning system simple.

ii) Failure to develop awareness about corporate planning process in theorganization.

iii) Corporate planning tries to do all planning by itself.

iv) Chief Executive gives planner a low status.

v) Failure to modify the corporate planning system with the charging conditions inthe company.

vi) Planner has only a part time interest in planning.vii) There is conflict between available soft database and managers need for hard

answers.


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viii) Top management becomes so engrossed in current problems that it spendsinsufficient time on the corporate planning process.

Bhattacharya and Chakravarti have observed some commonalities in instances of successful introduction of corporate planning in Indian companies. A fewprerequisites for success in corporate planning are as follows:

i) The chief executive must be totally committed and involved in the corporateplanning process.

ii) Participation of those executives who would be responsible for implementationmust be ensured.

iii) The process of corporate planning should be introduced on continuous basis tocope with ever changing environmental factors.

iv) The executives must understand that the real purpose of corporate planning is toprovide direction to the organization.

Activity 2

1) Discuss the nature and process of corporate planning.

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2) Name three to four big companies where corporate planning exercise wasinitiated in recent years.

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3) Briefly mention the reasons of failure of corporate planning.

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1.4 IMPLEMENTATION OF CORPORATE PLAN

Implementation refers to those objectives which are necessary for achieving the plansalready formulated. Quite often, companies having good corporate plans are notsuccessful at market place. The planning commission in India has formulatedelaborate plans for poverty alleviation through a number of programmes but it is awell known fact that the achievements in terms of the original goals are far from thetargets. It is to be noted that the implementation of strategy is mainly anadministrative task based on strategic as well as operational decision making. Thisactivity primarily refers to action and doing. The task of strategy formulation is some


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what distinct. It is primarily an entrepreneurial activity and this managerial task requires analysis and thinking.

Implementation of corporate strategy requires the analysis of the following aspects:

! Project Implementation

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Procedural Implementation! Resource Allocation

! Structural Implementation

! Behaviorial Implementation

! Functional Implementation

Any organization which is planning to implement strategies must be aware of theprocedural framework within which the plans, programmes and projects have to beapproved by government agencies. The regulatory mechanisms for trade, commerce

and industry in India span the whole range of legal structure from the constitution of India, the Directive Principles of state policy to the rules and procedures imposed bythe implementing authorities at the local level. The requirements of licensing SEB,MRTP, foreign collaboration, labour laws, environmental protection laws etc. are tobe seen carefully. The resource allocation for budget be based on either of thefollowing methods:

! Strategic Budgeting

! Zero Base Budgeting

! PLC Based Budgeting

! BCG Budgeting

The total responsibilities to implement strategies (structural implementation) has tobe subdivided as follows:

i) Defining the major tasks required to implement a strategy.

ii) Grouping task on the basis of common skill requirements.

iii) Sub-division of responsibility and delegation of authority to perform tasks.

iv) Coordination of divided responsibility.

v) Design and administration of the information system.

vi) Design and administration of the control and appraisal system.

vii) Design and administration of the motivation and development system.

viii) Design and administration of the planning system.

The first four mechanisms will lead to the creation of the structure. The remainingmechanisms are devised to hold and sustain the structure.

The aspects of strategy implementation that have an impact on the behaviour of strategies in implementing the chosen strategies are related to behaviorialimplementation . In this regard, the following issues are important:

! Leadership

! Corporate Culture


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! Corporate politics and use of power! Personal values and Business ethics! Social Responsibility

Rather than letting strategy implementation suffer due to politics and power gameswithin organizations, strategists have to learn to use them to implement strategies.

Functional implementation is carried out through functional plan and policies in fivedifferent functional areas. Operational implementation is performed in four areas foroperational effectiveness. The areas are productivity, process, people and pace. Theproductivity is the measure of the relative amount of input needed to secure a givenamount of output. Pace is the speed of operational implementation and is measured interms of time. Efficiency is the parameter often used to express the pace of operational implementation.

1.5 REVIEW AND EVALUATION OF CORPORATEPLAN

Corporate planning cannot be said to be effective unless management monitor howwell the planned actions are matching actual achievements as implementationprogrammes. If they find that the actual performance does not confirm to the plannedperformance, corrective action is taken to enforce a strategy that is not being followedor modify corporate plan that is not working. Strategic evaluation operates at twolevels.

! Strategic Level! Operational Level

The idea of strategic control is of a relatively recent origin and its techniques are still

in an embryonic stage. Four types of strategic controls are premise, implementation,strategic surveillance and special alert control. Operational control consists of settingstandards, measuring performance, analysing variance and taking corrective actions.MBO, network techniques, balanced scorecard, key factor rating, bench marking,value chain analysis, systems modeling, responsibility control centers, etc. are thetechniques of strategic evaluation and control.

The following aspects differentiate strategic control with operational control:

i) Strategic control is related to external environment while operational control isrelated to internal organization.

ii) Strategic control has longest time horizon.

iii) Control is exercised exclusively by top management in strategic control.

iv) Budget schedules and MBO are used in operational control.

1.6 APPROACHES TO CORPORATE MANAGEMENT

Corporate management systems vary from organization to organization dependingon a variety of factors: environmental conditions, organizational size and complexity,age, top management values and styles. Variations in the corporate managementsystems across organization may be found first in the top managements basicapproach to carry on corporate planning. These approaches are as follows:

Top down Approach:- In this approach, the top management decides everything andthe implementation is being taken care of by the middle and lower level managementas instructed by top management.


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Bottom up Approach:- This approach takes into account the realities andcomplexities of operations at the ground level. The top management adopts an opendoor approach. Suggestions are invited from all levels.

Hybrid Approach:- This is a combination of top down and bottom up approacheswhich is generally used in decentralized companies. There is vertical communicationbetween top management and the Strategic-Business Units (SBUs) at different phasesof the corporate planning and implementation process.

Team Approach:- Where lateral communication between the top managers is easier.The chief executive may himself in collaboration with senior managers, preparecorporate plans.

Activity 3

1) What are the methods of resource allocation?

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2) Explain Hybrid approach and Team approach in corporate management.

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3) Distinguish main points of difference between strategic control and operationalcontrol.

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1.7 STRATEGISTS AND THEIR ROLE INCORPORATE MANAGEMENT

Strategists are individuals or groups who are primarily involved in the formulation,implementation and evaluation of strategy. There are persons outside the organizationwho are also involved in various aspects of corporate management. In this section, weshall assess their role in corporate management:

Board of Directors

The role of the board of directors has come under intense scrutiny in recent timesleading to the emergence of the issue of corporate governance. It relates to the


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functioning of the board of company and the conducting of the business internally andexternally. The composition of Board of Directors in some of the organizations isnarrated below:

State Bank of India 7 Whole time Directors

4 Part time Directors

6 Nominee Directors

Larson & Toubro Ltd. 6 Whole time Directors


TISCO 2 Nominee Directors

2 Whole Time Directors

9 Part Time Directors

Reliance Industries Ltd. 5 Whole time Directors


2 Nominee Directors

The Companies Act, 1956 specified the following:

i) One-third of directors will retire by rotation.

ii) A public limited company must have at least three directors and a private limitedcompany must have at least two directors.

iii) Only individuals and not the institution, can be appointed as directors.

The role of the board is to guide the senior management in setting and accomplishingobjectives, reviewing and evaluating organizational performance and appointingsenior executives.

Chief Executive Officer

The CEO is designated as the managing director, executive director, president orgeneral manager in business organization. As the chief strategist, the CEO plays amajor role in strategic decision making with the increase in size. Many companieshave adopted the practice of sharing the responsibility of chief executive among twoor more persons. In India, Reliance Industries has chairman, vice- chairman andmanaging directors while L&T has managing director and joint managing directors.ITC Ltd. has a multiple executive system in the form of corporate managementcommittee. Attributes like self management and time management are very importantfor CEOs.

Entrepreneurs

The entrepreneurs always search for change , respond to it and explicit it as anopportunity. The entrepreneur is a venture capitalist. They play a proactive role instrategic management. As initiators, they provide a sense of direction to all concerned.S. Kumar Sundram as the chairman of the Bank of Madurai Ltd., and after his deathin 1986, the new chairman S.V. Shanmugavadivelu provide an excellent example of the role of entrepreneurs as strategists.

SBU level Executives

In corporate management, SBU level strategy formulation and implementation are the

primary responsibilities of the SBU level executives. They act as divisional heads.They weild considerable authority within the SBU while maintaining coordinationwith other SBU heads and corporate level management.


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Activity 4

i) Critically evaluate the role of Board of Directors in corporate management.

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ii) State three important factors forcing the immediate need for corporatemanagement.

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1.10 SUMMARY

Corporate management is a broad phenomenon and covers the activities of corporateplanning, implementation of corporate plans, evaluation and control of corporateplans. The concept of corporate management has moved through the stages of adhocism, planned policy, environment strategy interface and corporate planning.Corporate management has the following broad characteristics.

! encompassing entire management process!

short term as well as long term! all pervasive, integrative and relates to all levels of management! concerned with coping uncertain future with active intervention.

Corporate planning is a way of keeping the companys eyes open. It is acomprehensive planning process which involves continued formulation of objectivesand the guidance of affairs towards their attainment. This process is continuous and iscarried on by top management. The process involves the following steps:

! Formulation of strategic intent! Environmental appraisal

! Generation of strategic alternatives! Evaluation of alternatives! Decision in terms of corporate plan

In India, corporate planning could not bring desired results. Factors like poorparticipation, complicated process, part time interest, domination of routine issuesbring bottlenecks to effectiveness in corporate planning process.

Implementation refers to those activities which are necessary for achieving the plansalready formulated. This administrative task is based on action and decision making.The issues like project, procedure, structure, resource allocation, behaviour and

managerial functions need special attention.Review and evaluation of corporate plan operate at two levels i.e. strategic control andoperational control. Budgets, schedules and MBO are used in operational control.


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Four types of strategic control are premise, implementation, strategic surveillance andspecial alert control.

Variations in the corporate management systems may be top down approach, bottomup approach, hybrid approach and team approach. Board of Directors, Chief Executive Officer, Entrepreneurs, SBU level executives and consultants play animportant role in corporate management process. Scarcity of resources, fasttechnological changes, LPG, changing human values etc. are forcing the strategists topush the case of effective corporate management. Non business organizations have toadopt a distinct corporate management process to cope up with the changes in theemerging environment.

1.11 KEY WORDS

Corporate Management :

includes corporate planning, implementation and evaluation.

Corporate Planning :

is a continuous process of making entrepreneurial decisions systematically and withthe best possible knowledge of their future, organizing systematically the effortneeded to carry out these decisions.

Implementation :

refers to those activities which are necessary for achieving the plans alreadyformulated.

Strategic Control :

is aimed at a continuous assessment of the changing environment to see that thestrategy is not out of line with it.

Operational Control :is directed towards the evaluation of real time action.

Hybrid Approach :

a combination of top down and bottom up approach of corporate management.

1.12 SELF ASSESSMENT QUESTIONS

1) What is corporate planning and what are its important characterstics?

2) Corporate planning is as good as its implementation Discuss.

3) What is corporate management? Discuss its nature and scope.4) Explain the benefits and failures of corporate planning.

5) Narrate corporate planning process in brief. Also state the benefits of corporateplanning.

6) Explain various types of implementation issues in brief.

7) What is behavioral implementation? Explain it with the help of the details of acompany.

8) What is strategic control? How is it different from operational control?

9) Narrate briefly the approaches to the corporate management. Which one is the

best in Indian environment?10) Critically evaluate the role of board of directors in corporate management

process.


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11) Write a note on corporate management in non- business organizations.

12) Write notes on the following:

a) Procedural implementation

b) Role of consultants in corporate management

c) Approaches to corporate management.

1.13 FURTHER READINGS

Shrivastava, R.M., Management Policy and Strategic Management , HimalayaPublishing House, Bombay. 1999

Mamoria C.B., Mamoria Satish, Rao, P. Subba, Business Planning and Policy ,Himalaya Publishing House, Bombay.2001

Ghosh, P.K., Business Policy Strategic planning and Management , Sultan Chand& Sons, New Delhi 1996

Kazmi, Azhar, Business Policy and Strategic Management , Tata Mcgraw HillPublishing Co, Ltd., New Delhi-2002.

Miller A. and G. G. Den Strategic Management Mcgraw hill, New York 1996

Prasad, L.M., Business Policy: Strategic Management , Sultan Chand & Sons, NewDelhi. 2002

Glueck WF and LR Iavch, Business Ploicy and Strategic Management Mc grawHill, New York 1984.

Thompson J.L. Strategic Management: Awareness and Change , InternationalThompson Business Press, London 1997.

Shrivastava, R.M., Corporate Strategic Management , Pragati Prakashan, Meerut,1995.


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Management

Block

2CORPORATE GOVERNANCEUnit 4

Historical Perspective 5

Unit 5

Top Management and Corporate Governance 11

Unit 6

Code and Laws for Corporate Governance 18

Case Study 33


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Management

Corporate Governance 2


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UNIT 4 HISTORICAL PERSPECTIVEObjectives

After going through this unit, you should be able to:

understand the meaning of corporate governance;

identify the need for corporate governance;

trace the history of corporate governance; and

explain corporate governance in Indian context.

Structure

4.1 Introduction

4.2 History

4.3 Need for Corporate Governance

4.4 Corporate Governance in Indian Context4.5 Summary

4.6 Self Assessment Questions

4.7 Further Readings

4.1 INTRODUCTION

Change is the order of the day. Advancement in science and technology has changedthe way we live. Globalisation and liberalization has changed the way we do ourbusiness. There is change in environment, change in culture and change in ethos. This

change has brought some negative impacts along with the positive ones. There isdecline in ethics and values that ought to be followed by everyone including states andcorporates. This means that there is loose governance by these entities. When thishappens the objectives set for the entity cannot be achieved. In this unit we shallfocus on the meaning, objective and nuances of corporate governance.

Before we understand the term Corporate Governance (CG), let us first understandthe term governance. The concept of governance has been known in both political andacademic circles for a long time, referring generally to the task of running agovernment, or any other appropriate entity for that matter. According to the WorldBank, Good governance is epitomized by predictable, open and enlightened policymaking, a bureaucracy imbued with professional ethos acting in furtherance of thepublic good, the rule of law, transparent processes, and a strong civil societyparticipating in public affairs. On the other hand, Organisation for EconomicCooperation and Development (OECD) defines governance as the use of politicalauthority and exercise of control in a society in relation to the management of itsresources of social and economic development. This broad definition encompasses therole of public authorities in establishing the environment in which economic operatorsfunction and helps in determining the distribution of benefits, as well as the nature of the relation between the ruler and the ruled. Good governance encompasses all actionsaimed at providing its citizens, a good quality of life.

With the rapid change in the business environment and emergence of new regulations

by world bodies like EEC, WTO, OECD, World Bank etc., the concept of CG isgaining momentum. Corporate governance is a concept rather than an instrument. Itfocuses on appropriate management and control structure of a company. Alsoincluded in the concept are power relations between owners, the board of directors,


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Corporate Governance management and the stakeholder. Most definitions relate to control of a company ormanagerial conduct. The Cadbury Report (U.K.) states; Corporate governance is thesystem by which businesses are directed and controlled. OECD definition says,Corporate governance provides the structure through which the objectives of thecompany are set, and the means of attaining those objectives and monitoringperformances are determined. The following definition helps us in understanding the

concept even better: Corporate governance is not just corporate management, it issomething much broader to include a fair, efficient and transparent administration tomeet some well defined objectives. It is a system of structuring, operating andcontrolling a company with a view to achieve long term strategic goals to satisfyshareholders, creditors, employees, customers and suppliers, and complying with thelegal and regulatory requirements, apart from meeting environmental and localcommunity needs. When it is practiced under a well-laid out system, it leads to thebuilding of a legal, commercial and institutional framework and demarcates theboundaries within which these functions are performed. To state in simple terms,corporate governance relates to a code of conduct, the management of a companyobserves while exercising its powers. Quality corporate governance not only serves

the desired corporate interest, but is also a key requirement in the best interests of thecorporates themselves.

Box 4.1: Some Useful Definitions of Ethics and Corporate Governance

Sri Aurobindo

But that which determines his ethical being is his relations with God, the urge of the Divine whether concealed in his nature or conscious in his higher self or innergenius.He obeys an inner ideal, nor to a social claim or a collective necessity. Theethical imperative comes not from around, but from within and above him.

Peter F. DruckerThe Ecological Vision (1993)

Above all, the ethics or aesthetics of self-development would seem to be tailor-made for the specific dilemma of the executive in modern organization.

Their function demands the self-discipline and the self-respect of the superior man.

Garrett and Klonoski, 1986:2

Business ethics is concerned primarily with the relationship of business goals andtechniques to specifically human ends. It studies the impacts of acts (DECISIONS)on the good of the individual, the firm, the business community and society as awholebusiness ethics studies the special obligations which a person and a citizenaccepts when he or she becomes a part of the world of commerce.

Robert C. SolomonEthics and Excellence (1992)

.integrity, in the face of conflict of the virtues, is the challenge rather than theanswer.

It is moral courage moral courage is not self-sacrifice

Moral courage is not self-righteous obstinacy and it is not at all opposed tocompromiseMoral courage includes an understanding of the big picture, thepurpose(s) of the organization, and the way in which the organization or some partof it thwarts its own best intentions.

Corporate governance is a system by which companies are run. It relates to the setof incentives, safeguards and the dispute resolution process that is used to controland coordinate the actions of the agents on behalf of the shareholders by the Boardof Directors.


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Historical PerspectiveActivity 1

Enumerate five points to highlight the importance of Corporate Governance as aconcept than an instrument.

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4.2 HISTORY

Though the terms governance, good governance and corporate governance isincreasingly used in development literature since recent times, the concept of governance is not new. It is as old as human civilization. The eastern civilization hasenumerable examples, where in emphasis was laid on good governance. The activityof the government of the state, as envisaged by the great eastern thinkers on polityrelates to all aspects of human life social, economic and religious. Peace, order,security and justice were regarded as the fundamental aims of the states (the largestform of corporate). State was considered a means to the realization of decent, goodand meaningful life and justice were regarded as the fundamental aims of the states(the largest form of corporate).

Manu, the son of Prajapathi was the first king who brought out a comprehensive codeof conduct or governance for men, society and the state as a whole in his treaty called

Manu Dharma Shastra. In Mahabharata while delivering his first formal discourse on

polity, Bhisma says in equivocal terms that the kin should always put the interest of his subjects over that of his own. The great political thinker of 3 rd century BC namelyKautilya in his treaty Arthasastra has laid down the ideals at which the king wasexpected to aim.

In eastern literature a good society is one wherein a high, ethical standard of life ischaracterized by the pursuit of wealth, enjoyment and liberation. It is the prevalenceof dharma, which characterizes an ideal society. Such a society is possible if thegovernance of the country is based on clear, efficient and effective administration andall the rulers aim at this goal in the ancient times.

Box 4.2: Ageless Ethics and Governance

l Satyavadi Raja Harishchandral Sri Rama and The Concept of Rama Rajya : Raghukul Reeti Sadaa Chali Aayee

Praan Jaye Par Vachan Na Jaye

l M. K. Gandhi: My Experiments with Truthl Government of India : Satyameva Jayate

However people in the west started feeling the need for good corporate governance inearly 80s as the corporate misdemeanours increased. In U.K., in 1980s, the corporatesector was beseeched with a number of problems. Business failure, limited role of auditors, weak accounting standards culminated in loss of control. The CadburyCommittee was set up by the London Stock Exchange to address the dreary financialaspect of corporate performance. A few years later, directors pay became such a livepolitical issue that a study group on directors remuneration was formed under SirRichard Greenbury. Then came two other committees the King Committee and the


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Corporate Governance Hampel Committee to diagnose the issue of corporate governance. The Asianfinancial crisis, recent scandals in US, Italy, India have triggered fresh initiatives of thinking towards good governance. Corporate governance has been much talked inIndia particularly after 1993. Liberalisation brought in its wake a spate of corporatescandals, the first of which was a bank scam involving securities. CRB scam and theUTI episode made it very clear that a serious thinking is required on the front of

corporate governance. SEBI in India has taken the initiative in framing new rules andlaws to strengthen corporate governance. Committees like Kumara Mangalam BirlaCommittee (2000), Naresh Chandra Committee (2002) brought out reports oncorporate governance. SEBI has also constituted a committee on corporategovernance under the chairmanship of Sri N.R. Narayana Murthy.

Presently corporate India is going through a great churning phase, as companies aredoing business with global ambition, placing a lot of emphasis on governance andtransparency.

4.3 NEED FOR CORPORATE GOVERNANCE

Recent corporate failures and scandals involving mis-governance and unethicalbehaviour on the part of corporates rocked the corporate sector all over the world,shook the investor confidence in stock markets, and caused regulators and others toquestion the assumption that most companies do the right thing most of the time.These incidences diminished reputation and goodwill of even those corporates whoenjoy the trust and confidence of public at large. These factors highlight theimportance of good corporate governance. On the other hand, corporate governance isimportant because corporate decisions impinge on its shareholders, customer,creditors, the state and employees. Globally the objective of corporate governance isto maximize long-term shareholder value. With the assumption that capital andfinancial markets are working properly, anything that maximizes shareholder value

will necessarily maximize corporate prosperity.For sound governance, managers need to act as trustee of shareholders, preventasymmetry of benefits between sections of shareholders, especially between owner-managers and the rest of shareholders. They also need to be a part of societal concernsabout labour and environment. In fact stock market analysts see these days a greatercorrelation between governance and returns. Investment analysts recommend acompany based on strength or weakness of a companys governance infrastructure.Confidence of investors, both domestic and foreign, is the need of the hour. This is toattract patient long-term capital that will reduce their cost of capital. Thus, there is aneed for intellectual honesty, integrity and transparency, which form the basis forgood corporate governance.

Activity 2

State any three prerequisites for a sound corporate governance.

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Historical Perspective4.4 CORPORATE GOVERNANCE IN INDIAN

CONTEXT

As it was briefly stated earlier, corporate governance has been much talked about inIndia particularly after 1993. Liberalization brought mixed results for Indianeconomy. Noticeably, it brought in its wake a spate of corporate scandals. Later onscores of companies made public issues with large premium and then disappeared;prospectus misled the public. The management of most of these companies divertedfunds and investors had no option but to repent their lost money. Primary marketliterally collapsed in the after math of these failures. Slowly, many a family ownedbusinesses moved to become widely held limited companies. The question, how tofunction in a corporate setup overriding family interest and obligations called for acode of governance. Similarly, corporate banks also came under strain due to scams;governance failure was total. The story of UTI is also well known where millions of small investors lost their capital due to inadequate management practices and weak supervision.

Auditors were following questionable accounting practices on behest of themanagement and often advising on how doubtful accounting choices might be madeso as to remain on the right side of law and at the same time, escape detection by usersof financial information. All these factors put strong pressure on many corporates toevolve a good governance practice.

Over a period of time in India companies like Tata Group, Infosys, Wipro haveevolved sound principles of governance, intertwining corporate governance withsocial responsibility. These companies have become global and it is common to findglobal norms of accounting and disclosure being followed in these corporate houses.Rights of employees, stock options, independent directors, meeting quality norms,price warranty and guarantee- all these have made room for quality governance.

Managers have indeed become trustees of shareholders.

It began in 1998 with the Desirable Code of Governance- a voluntary code publishedby CII, and the first formal regulatory framework for listed companies, established bythe SEBI in February 2000, following the guidelines enunciated by the KumaraMangalam Birla Committee Report. On 21 st August, 2002, the Department of Company Affairs under the Ministry of Finance appointed Naresh ChandraCommittee to examine issues pertinent to governance. The committee looked intofinancial and non-financial disclosure and independent auditing and board oversightof management.

Apart from financial compliance or disclosure, the independent oversight of

management is also important. Many companies have disappeared, vanished eitherdue to fraud or poor quality of board resulting in lack of independent oversight. TheKumara Mangalam Birla Committee focused on the role of independent and statutoryauditors and also the role of the board of directors.

SEBI constituted a committee on corporate governance under the chairmanship of SriN. R. Narayana Murthy. The committee included representatives from the stock exchange, chamber of commerce and industry, investor associations and professionalbodies, which debated on key issues related to corporate governance. Findings andrecommendations of these committees are discussed in the later chapter.

Thus we find that the corporate India is going through a great churning phase. New

aggressive companies are doing business with global ambitions, placing a lot of emphasis on governance and transparency. FIIs are very serious about goodgovernance and disclosures. Liberalization brought great challenges, after initial joltsand pain of restructuring, companies are seeing profits more than before.


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Corporate Governance4.5 SUMMARY

Good corporate governance is good business because it inspires investors confidence,which is very essential to attract capital. A few unscrupulous businessmen can, largelyundo all the confidence built through the good work by the good companies over time.They need to be handled with iron hands.

However, corporate governance goes beyond the realm of law. It comes from theculture, mindset of management and cannot be regulated by legislation. Thewatchwords are openness, integrity and accountability.

Companies need not be myopic with short-term goals, caring only about quarterlyresults or immediate stock prices in the bourses, or that cherished P/E ratio. Goodgovernance maximizes long-term shareholder value, which in turn takes care of short-term goals too.


1) Explain the concept of Corporate Governance.

2) Why has it become necessary for business houses to have a good CorporateGovernance? Discuss.

3) Discuss the emergence of Corporate Governance as a concept.


Aiyangar. K. V. R. (1941). Rajadharma . The Adyar Library, Chennai.

Altekar. A.S. (1992). State and Government in Ancient India , Motilal Banarsidas,

New Delhi.Balasubramanium N. (January-March, 1997). Towards Excellence in Board Performance ,Management Review.

Gopalasamy. N. (1998)., Corporate Governance : The New Paradigm , WheelerPublishing, Allahabad.

Narayana Murthy, N.R., Corporate Governance: The Key Issues , Vikalpa, vol. 24,No.4.

O.E.C.D. Report on Corporate Governance .

Prasuna D.G. (June 2001). Governance Matters , Chartered Financial Analyst, June2001.

Report of Sir Adrian Cadbury Committee on Financial Aspect of CorporateGovernance (1992).

www.business-ethics.com

www.sebi.gov.in


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Management

Block

3COMPETITIVE SCENARIOS AND STRATEGYUnit 7

Strategies for Dynamic and Stable Markets 5

Unit 8

Strategies for Global Markets 16

Unit 9

Market Structures and Network Externalities 25

Case Study 37


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BLOCK 3 COMPETITIVE SCENARIOS ANDSTRATEGY

The dynamics of the environment in which a firm operates plays a critical role in theformulation of its strategy. It can increase or decrease opportunities or threats for afirm and can often force the firm to make strategic adjustments. Hence, a basicunderstanding of the changes in the environment it operates and a correct response tothese changes can mean the difference between success and failure of a firm.Block 3 deals with the various business environments which exist and the strategicchoices which are available to a firm in each case.

Unit 7 Strategies for Dynamic and Stable Markets starts off by explaining thekey differences between dynamic and stable environments. The concept of productlife cycle and how this concept helps predict the events in the environment is explainedin this unit. It then describes the characteristics of dynamic and stable environmentsand the strategic options available to firms in different environments.

Unit 8 Strategies for Global Markets deals with strategies in global markets asopposed to domestic markets which are dealt with earlier in MS 11: StrategicManagement. This unit explains the global business environment and the drivers forglobal expansion. It then explains the strategic choices available to a firm and thevarious modes of entry into global markets.

Unit 9 Market Structures and Network Externalities deals with the network externalities and how they affect the strategies of a firm. The Block ends with a caseof a truly Indian MNC Ranbaxy Laboratories Ltd. to illustrate how companies canuse global expansion as a growth strategy.


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MS91Advanced Strategic

Management

COMPETITIVE SCENARIOS AND STRATEGY 3


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UNIT 7 STRATEGIES FOR DYNAMIC ANDSTABLE MARKETS

Objectives

After reading this unit, you should be able to:

understand the difference between dynamic and stable environments;

know how the concept of life cycle predicts the events and explains the dynamicsin the environment;

identify the characteristics of a dynamic environment and know the differentstrategies applied in a dynamic environment; and

finally, understand the various strategies adopted by firms in a stableenvironment.

Structure

7.1 Introduction7.2 Concept of Product Life Cycle

7.3 Dynamic Environment

7.4 Strategic Choices in a Dynamic Environment

7.5 Decision to Enter Dynamic Markets

7.6 Stable Environment

7.7 Strategies in a Stable Environment

7.8 Summary

7.9 Self Assessment Questions

7.10 Key Words

7.11 Further Readings

7.1 INTRODUCTION

The dynamics of an industry plays a critical role in the formulation of a firms strategy.It can increase or decrease opportunities or a threat for a firm and it often force thefirm to make strategic adjustments. A basic understanding of the process of evolutionis essential since correct response to the change in the competitive environment canmean the difference between success and failure of a firm. The first part of the unit

will present the concept of product life cycle to explain the process of industryevolution and its significance for the formulation of strategy. In the latter part of theunit, growth strategies in dynamic and stable environments will be dealt in detail.

7.2 CONCEPT OF PRODUCT LIFE CYCLE

In todays business environment, it is not clear what changes are taking place currently,much less predict which changes will occur in the future. Given the importance of predicting the business environment accurately, it is desirable to have a robusttechnique which will help in anticipating the pattern of industry changes that one canexpect to occur.

One of the most well-known and reliable tools for predicting the probable course of events in the future is the product life cycle (PLC) concept. The basic hypothesis of this concept is that an industry passes through a number of phases starting with


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Competitive Scenariosand Strategy

introduction followed by growth, maturity and decline phases. Product life cycle theorypredicts that industry growth follows an S-shaped curve because of the process of innovation and diffusion of a new product. The introduction phase is oftencharacterized by a flat curve reflecting the difficulty of overcoming the buyers inertiaand their initial reluctance to try unknown and untested product. However, the productenters a rapid growth phase once the product proves successful. This rapid growth

phase reaches a plateau once the product reaches all the potential buyers. This phaseis called the maturity phase. In the final phase of the product life cycle the growthtapers off and the demand for the products starts declining as new substitutes startappearing in the market. The predictions of product life cycle theory about thestrategies, competition and performance are explained in the table below.

Table 7.1: Strategy, Competition and Performance in Different Phases of ProductLife Cycle

Introduction Growth Maturity DeclineProduct Poor quality,

no standards,frequent designchanges, basicproduct design

Good quality,productimprovements,technical andperformancedifferentiation

Superior quality,standardization,less productchanges, lessproductdifferentiation

Very littleproductdifferentiation

Buyerbehaviour

Buyer inertia,buyer need tobe persuaded totry the product

Buyers willaccept unevenquality,widening buyergroups

Repeat buying,saturation, massmarket

Buyers aresophisticated

Marketing Highadvertisingexpenditureand highmarketingcosts,skimmingpricing

Higheradvertisingcosts but aspercentage of sales it will belower thanintroduction

Broaden productline, marketsegmentation,service isimportant anddeals are quitecommon

Lowadvertising andmarketing costs

Strategy Increase marketshare quickly,R&D andengineering

capabilities arekey factors

Change priceand qualityimage.Marketing is a

key area

Competitivecost is key. Badtime to increasemarket share.

Also bad time tochange price orquality image

Cost controlkey

Competition Fewcompetitors

Manycompetitors

Pricecompetition,shakeout

Exits and fewercompetitors

Risk High risk Growth coversrisk

Cyclical trendsets in

Margins andprofits

High marginsand low profits

Highest profitsand fairly highprices

Lower profits,lower margins,falling prices.Increasedstability of market shares

Falling prices,low prices andmargins. Pricemay rise in laterstages of decline phase


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7

Strategies for Dynamicand Stable Markets

One major limitation of the PLC concept as predictor of industry evolution anddynamics is that it attempts to describe one pattern of evolution which will invariablyoccur. And except for the industry growth rate, there is little or no underlyingexplanation provided by this concept as to why the competitive changes associatedwith life cycle will happen. Moreover, the industry evolution can have so manydifferent paths, the life cycle pattern may not always hold good. Nevertheless, the

PLC is a robust model of industry evolution and it predicts the strategy, competitionand the performance of a firm in different business environments. Generally,industries which have products in the introduction and growth phases operate in adynamic environment, while those with products in the mature phase operate in amore stable environment. The stable and dynamic industry segments differ from oneanother due to the difference in speed and direction of the following industrydimensions:

Long-term changes in growth Changes in buyers segments Buyers learning

Diffusion of proprietary knowledge Product innovation Marketing innovation Process innovation Government policy changes Entry and exit of competitors

A good understanding of all the above dimensions that can shape the industry dynamicswill assist a firm to face and in some cases even influence the structural changes. Afirms ability to predict the future events will provide a valuable head start to directenvironmental forces in ways appropriate to the firms position. In fact, successfulfirms do not view environment change as fait accompli , to adjust to, but as anopportunity.

Industry environments vary in their basic strategic implications along a number of important dimensions, namely:

Industry concentration State of industry maturity Exposure to international competition

The following sections will discuss the industry environment and the strategies basedon these dimensions. In addition, in each of these environments, the structure of theindustry, strategic issues and strategic alternatives are also discussed. Two importantbusiness environments are selected for discussion, namely dynamic environmentcharacterized by very dynamic changes and stable environment typified by steadierand stable variations.

7.3 DYNAMIC ENVIRONMENT

Generally dynamic environment is characterised by newly formed or re-formedindustries that has been created by technological innovations, emergence of newconsumer needs/ segments, or other socio-economic changes that elevate a newproduct or a service to the level of potentially viable business opportunity. Dynamicenvironment is also created when old/traditional industries experience fundamentalshifts in competitive rules coupled with growth in scale by orders of magnitude, caused


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by some of the factors mentioned earlier. The essential characteristic of a dynamicenvironment is the absence of any rules of the game which may pose a risk orprovide an opportunity. In either case it must be managed from the strategicmanagement point of view. The following section outlines the common characteristicsof dynamic industry environment.

Characteristics of Dynamic Environment

Embryonic and Spin-off Firms

Dynamic environment has a greater proportion of newly formed companies comparedto more stable industry environment. Related to the presence of these companies isthat of many spin-off firms or firms created by personnel leaving firms in the industryto create their own firms.

Technological and Strategic Uncertainty

Usually there is a great deal of technological uncertainty in a dynamic industryenvironment. Alternate production technologies may be at R&D stage or experimentalstage, all of which not be tried on a large scale. Related to the technologicaluncertainty, but on a broader scale, are a wide variety of strategic approaches oftentried by the industries in dynamic environment. There is great deal of uncertainty aboutthe strategies of the competitors with different firms following different approaches toproduct/market positioning, marketing, etc.

High Initial Costs coupled with steep Cost Reduction

Small production volumes coupled with newness of technological/production processproduce high costs in a dynamic environment relative to a more stable environment.But the steep learning curve is followed rapidly by a succession of ideas related toimproved production procedures, plant layout, and employee productivity and so on.Additionally, increasing sales make major additions to the scale and accumulatedvolume of output produced by firms. If the gains due to learning are combined with

increasing market opportunities, the initial high costs are eclipsed by the rapid decline incosts.

First-Time Buyers

Most of the buyers of the new product/services produced by embryonic industries in adynamic market are first-time buyers. The task of a firm in a dynamic environment isthus of convincing the buyers and persuading them to try the new products or servicesinstead of the existing ones.

Short-Time Horizons

The pressure to develop customers or produce products to meet the demand is so greatthat problems are dealt expeditiously rather than relying on comprehensive analysis of future conditions.

The other features of a dynamic industry environment include inability of firms toobtain raw material and components, absence of required infrastructure, absence of product or technological standardization, erratic product quality, customersconfusion, etc. In an environment described above, firms will have to craft a strategyto survive and thrive which radically differs from strategies adopted by firms in morestable conditions. The following are some of the generic strategic alternativesavailable to a firm.

7.4 STRATEGIC CHOICES IN A DYNAMIC

ENVIRONMENTIndustries operating in a dynamic environment have to cope with the uncertainty andrisk inherent in the industry environment. The industry structure is highly amorphous,


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unsettled and rapidly changing and the rules of the game are largely undefined. Despitethese factors, the dynamic phase of an industry is perhaps the time when there is atremendous amount of latitude and freedom to experiment with new strategies andwhen the leverage from good choice is the highest in determining performance.

One of the strategic choices in a dynamic environment available to a firm is shapingand influencing the industry structure. A firm can set the rules of the game in areassuch as product policy and new product development, marketing approach, andpricing strategy. The firm can seek to define the rules within the constraints dictatedby the economics of the industry and its own resources in a way that yields thestrongest position in the long run.

Another strategic choice available to a firm to compete in a dynamic environment ischanging the orientation of its suppliers and channel partners. A firm must be willingto shift the orientation of its suppliers and distributors as the industry grows and startsmaturing. Suppliers should be encouraged (sometimes coerced) to respond to thefirms special needs in terms of varieties, service and delivery. Similarly thedistribution channels should be made more receptive in terms of investing in

distribution facilities and infrastructure, advertising, etc. and cooperate with the firm inall its marketing endeavours. Exploiting the supply chain in the early stages of theindustry can provide strategic leverage to the firm.

Given the dynamic nature of the industry environment and the fast pace of change,firms can adopt the strategy of exploiting their innovations and building an enduringlong run competitive advantage based on low cost or differentiation. Three variants of innovative strategy are available for a firm: i) to develop and market the innovationitself; ii) to develop the market and innovation jointly with other companies through astrategic alliance, and iii) to license the innovation to others and let them develop themarket. The optimal choice of the strategy depends on three factors, namely, thepossession of complementary assets to exploit its innovation and create a competitiveadvantage, the height of barriers to imitation by the competitors and the presence of capable competitors that can rapidly imitate the innovation.

Complementary assets are those required to exploit an innovation such as competitivemanufacturing facilities capable of maintaining high product quality while ramping upthe volume to meet the rapidly growing customers demand and state-of-the-artmanufacturing facilities that enable the firm to move quickly down the experiencecurve without encountering any hitches and bottle-necks in the production process.Complementary assets also include marketing know-how, adequate and competentsales force, access to good distribution channels, and an after-sales service andsupport network. These assets, in particular, can develop brand loyalty and help the

firm penetrate the market rapidly.Barriers to innovation are factors that prevent the competitors from imitating a firmsdistinctive and unique competencies. These barriers particularly are effective inpreventing second and late entrants from imitating the innovation. Ultimately, allinnovations are susceptible to imitation, but the higher the barrier the more difficult itis for the rivals to imitate.

Capable competitors are firms that can rapidly imitate the pioneering company. Arivals ability to imitate an innovation essentially depends on its R&D skills andaccess to complementary assets. In general, the greater the number of rivals with suchcapabilities, the more rapid is the imitation likely to be.

The strategy of going alone with the innovation makes sense when: i) the innovator hasthe necessary complementary assets to develop the innovation, ii) the barriers toimitation are high, and iii) the number of capable competitors is limited. The second


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variant of the innovation strategy, namely, developing and marketing the innovation jointly through a strategic alliance makes sense when i) the innovator does not possesscomplementary assets, ii) barriers to imitation are high and iii) there are quite a fewcapable competitors. Such an alliance is expected to prove mutually beneficial andeach partner can share in high profits which neither of them is capable of earning ontheir own. The final variant of the strategy which involves licensing makes most sense

when the i) innovating company lacks the complementary assets, ii) barriers toimitation are low, and iii) there are several capable competitors.

A vital strategic decision for competing in a dynamic industry is the appropriate timingof entry. While entry barriers are low in an emerging or embryonic industry, the risk can be quite substantial. Entering early is generally recommended when:

Image and reputation are important to buyer and the firm is confident of developing a good reputation by being a pioneer.

Customer loyalty is valuable and being first to the market helps build customerloyalty.

Being early puts the firm ahead of others on the learning curve, experience isdifficult to imitate and it will be neutralized by future technological generations.

Absolute advantage can be gained by early commitment to suppliers, channelpartners, etc.

However, early entry is risky when:

Cost of opening up the market such as customer education/awareness, regulatoryapprovals, etc. is great.

Technological change will make early investments obsolete and the second andlate comers can gain advantage by having access to more advanced and newertechnologies.

Early competition with small firms will be replaced bigger and more formidablecompetition at a later stage.

7.5 DECISION TO ENTER DYNAMIC MARKETS

A dynamic and developing industry is attractive to enter if it has the potential toprovide above average returns and if the firm is confident that it can create adefendable position in the long run. Quite often firms enter dynamic and riskyindustries when the existing firms are going rapidly and making good profits or the

ultimate size of the industry promises to be large. These are valid reasons to enter themarket, but a firm has to ultimately carry out a structural analysis of the industry/ environment (Porters five forces model) before leaping into the fray.

Activity 1

You work for a company in the IT Industry (software) that has developed newsoftware for banking industry. There are several other competitors who are also on theverge of introducing software products for the same industry. You need to do thefollowing:

i) Give a report to the management about the external environment. and the

strategies to compete in this environment.........................................................................................................................

........................................................................................................................


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...............................................................................................................................

.................................................................................................................................

ii) On the basis of this report, recommend strategies to compete in this environment.

..................................................................................................................................

..................................................................................................................................

..................................................................................................................................

..................................................................................................................................

7.6 STABLE ENVIRONMENT

As the industry traverses the dynamic phase, the intense competition during this stageleads to a shake-out phase. As consolidation takes place, the industry enters a stablephase characterised by a small number of large companies. And though the stable

industry may have some medium and small enterprises, the large companies dictate thecompetition because they can influence the Porters competitive five forces. In fact,these are the companies that developed the most successful generic strategies in theindustry. The transition to stable environment is nearly always a critical period forcompanies in an industry. It is a period during which fundamental changes often takeplace in companies competitive environment, requiring difficult strategic responses.Many firms have trouble perceiving these environmental changes clearly; even whenthey do, responding to them may require changes in strategy that firms may shy awayfrom. A shift to a more stable or mature industry environment can often bring about anumber of important changes in an industrys competitive environment. These arediscussed below.

With companies unable to maintain past growth rates merely by holding marketshare, they turn their attention to attacking the shares of the others. This may leadto outbreaks of price, service, and promotional warfare.

The product is no longer new and buyers are more knowledgeable andexperienced, having already purchased the product, sometimes repeatedly. Thebuyers focus shifts from deciding whether to purchase the product at all tomaking choices among brands. As a result of slower growth, more knowledgeablebuyers, and usually greater technological maturity, competition tends to becomemore costly and service oriented.

As the industry adjusts to slower growth, the rate of capacity addition in theindustry slows down. Firms need to monitor competitors capacity additions, andclosely time its capacity additions with precision. This is rarely done andovershooting of industry capacity relative to demand is, therefore, common.

As a result of technological maturity, often accompanied by productstandardization and increasing emphasis on costs, transition to stable environmentis often marked by the emergence of significant international competition.International rivals have different cost structures and different goals compared todomestic firms.

Slowing growth, more sophisticated buyers, more emphasis on market share, andthe uncertainties and difficulties of the required changes usually mean thatindustry profits fall in the short run from the previous levels. Some firms may bemore affected than others, the smaller firms generally the most. Falling profitsreduce cash flow during a period when they are needed the most.


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Rapid growth in the dynamic stage tends to hide errors and allow most companies inthe industry to survive and even to prosper financially. Experimentation is high, and awide variety of strategies can coexist. Carelessness and negligence are, however,generally exposed by stable industry. However, Maturity may force companies to meethead-on the need to choose among the various strategies described in the next section.

7.7 STRATEGIES IN A STABLE INDUSTRYENVIRONMENT

In a stable industry environment, strategic group of industries follow similar genericstrategies. Companies follow the same strategies as their rivals because any changeduring this phase is likely to stimulate a competitive response from their rivals. Infact, the main issue that firms need to contend in a stable industry environment is toadopt a strategy that simultaneously allows the firms to protect its competitiveadvantage while preserving industry profitability. In other words, in stable industryenvironment, competitive strategy hinges on how large companies collectively try toreduce the strength of the five forces of industry competition to preserve both

individual and industry profitability. In the next section, the various price and non-price strategies adopted by firms in a stable environment to deter entry of rivals intoan industry and to also reduce the level of rivalry within an industry are discussed.

Firms can generally use three strategies to prevent rivals from entering an industry.They are product proliferation, price cutting and excess capacity.

Product Proliferation

Most companies produce a range of products instead just one product. This is done totarget different segments with different products. Sometimes, companies expand theirproduct range to fill are market niches, which creates an entry barrier for potentialentrants sine they will now find it harder to break into an industry in which all the gapsor niches are filled. This strategy of plugging market niches is called productproliferation.

Rationalizing the Product Mix

Although a broad product line and frequent introduction of new varieties and optionsmay often be necessary and desirable, cost competition and fights for market share aretoo demanding sometimes to follow a product proliferation strategy. As a result,pruning of unprofitable items from the line and focusing attention on items that havesome distinctive advantage (technology, cost, image, etc.) is more desirable.

Process Innovation

The importance of process innovations usually increases in stable and mature industryenvironment, as does the advantage of designing the product and its delivery systemto facilitate lower-cost manufacturing. The success of the Japanese industry inindustries such as electronics, automobiles, etc. is attributed to this strategy.

Price Cutting

In some situations, price cutting can be used as a strategy to deter entry of othercompanies, thereby, protecting the profit margins of the incumbents in the industry. Forinstance, a firm can charge a high price for the product initially to seize short termprofits and then cut prices aggressively to build market share and deter new entrants at

the same time. The current players in the industry can thus send a signal to thepotential entrants that if they enter the industry, the incumbent players will use theircompetitive advantage to drive down prices to a level which will make it unviable fornew entrants to compete at that level.


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Excess Capacity

A third strategy that firms use to discourage entry of potential rivals involvesmaintaining excess capacity, that is, producing products much more in excess of thedemand. The incumbent companies may intentionally develop excess capacity to warnpotential new entrants that if they enter the industry, existing firms will strike back byincreasing the output and putting a downward pressure on prices until the entry wouldbecome unprofitable.

Buying Cheap Assets

Sometimes assets can be acquired very cheaply as a result of the distress sale of assets by companies unable to make successful transition to stable environment. Astrategy of acquiring distressed companies or buying liquidated assets can improvemargins and create a low-cost position if the rate of technological change is not toogreat.

Competing Internationally

A firm may break out of the stifling stable environment by competing internationallywhere the industry is more favourably structured. Sometimes equipment that isobsolete in the home market can be used quite effectively in international markets,significantly lowering the costs of entry there. Or industry structure may be a greatdeal more favourable internationally, with less sophisticated and powerful buyers,fewer competitors, etc. The shortcomings of this strategy are the usual risks involvedin international competition.

Apart from discouraging new entrants, firms also use strategies to manage theircompetitive interdependence and decrease rivalry. Several options are available tocompanies to manage rivalry within the industry. Product differentiation is one suchoption. It allows a firm to compete for market share by offering different products orby using different marketing techniques. The four competitive strategies based onproduct differentiation are based on different combinations of product and marketsegments (not markets as in Ansoffs matrix) are as follows:

Market Penetration

When a company expands market share in its existing product markets, it is said tofollow market penetration strategy. This strategy involves heavy advertising to promoteand create product differentiation. In a stable and mature industry the major objectiveof promotion is to influence consumers choice for the companys brands and products.A company can thus increase its market share by attracting customers.

Product Development

This strategy involves creation of new or improved products to replace existing ones.Product development strategy is vital for maintaining product differentiation andbuilding market share.

Market Development

Market development strategy involves finding new market segments for a companysproducts. A firm following this strategy will try to capitalize on its brand reputation inone market segment by looking for new market segments in which to compete.

Product Proliferation

This strategy is used to manage rivalry within an industry and to deter entry. Productproliferation strategy essentially involves having a product in each market segment orniche and compete face-to-face with rivals for the customers.


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Activity 2

Search the Web for a company which is in a stable environment. Based on theinformation available about the company and the industry it is operating in, try toexplain and comment on the current strategy it is pursuing.

................................................................................................................................

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7.8 SUMMARY

In this unit we have discussed the various strategies that firms can use in differentindustry environments. Developing an appropriate strategy to suit the needs of different industry environments is crucial for a firms survival. Companies mustalways be prepared for changes in the conditions in their environment if they are torespond to these changes in a timely manner.

In dynamic markets, developing a strategy to exploit technical innovations is a crucialaspect of competitive strategy. The three strategic choices for a firm in a dynamic

industry are: i) to develop and market the technology by itself, ii) to do so jointly withanother company, or iii) to license the technology to existing companies.

Stable environment is characterised by a few large companies whose actions are sohighly interdependent that the success of one companys strategy depends upon theresponses of its competitors. The principal actions initiated by companies to deterentry of competitors are: i) product proliferation, ii) price cutting, and iii) maintainingexcess capacity. The principal actions initiated by companies to manage rivalry in astable and mature industry include market penetration, product development, marketdevelopment and product proliferation.


1) What are the characteristics of a dynamic environment? List some industrieswhich are facing this situation and describe the features of the environment inwhich they operate.

2) For a firm which is operating in an industry listed in the answer to the previousquestion, suggest some strategies to survive and thrive.

3) How is stable environment different from a dynamic environment? Mention a fewindustries which in your opinion are operating in a stable environment. Explainbriefly the characteristics of a stable industry environment.

4) Suggest suitable strategies for industries which you believe are operating in astable environment.


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Strategies for Dynamicand Stable Markets7.10 KEY WORDS

Dynamic Environment: Dynamic environment is characterized by newly formed orre-formed industries that has been created by technological innovations, emergence of new consumer needs/segments or other socio-economic changes that elevate a newproduct or a service to the level of potentially viable business opportunity.

Excess Capacity: A strategy that firms use to discourage entry of potential rivals bymaintaining excess capacity that is, producing products much more in excess of thedemand.

Market Development: Market development strategy involves finding new marketsegments for a companys products.

Market Penetration: When a company expands market share in its existing productmarkets, it is said to follow market penetration strategy.

Product Life Cycle: An industry passes through a number of phases starting withintroduction followed by growth, maturity and decline phases. This concept is calledproduct life cycle.

Product Proliferation: Most companies produce a range of products instead just oneproduct. This is done to target different segments with different products. Thisstrategy of plugging market niches is called product proliferation.

Price Cutting: In some situations, price cutting can be used as a strategy to deterentry of other companies, thereby protecting the profit margins of the incumbents inthe industry.

Stable Environment: As the industry traverses the dynamic phase, the intensecompetition during this stage leads to a shake-out phase. As a result, the industry

enters a stable phase characterised by a small number of large companies.


John D. Daniels, Lee H. Radebaugh, Daniel P. Sullivan, International Business: Environments and Operations , Prentice Hall; 10 edition, 2003.

Michael A. Hitt, R. Duane Ireland, Robert E. Hoskisson, Strategic Management:Competitiveness and Globalization, Concepts and Cases, South-Western College Pub;6 edition, 2004.


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Management

Block

4STRATEGIC ENABLERS

UNIT 10

IT and Strategy 5

UNIT 11

R&D and Strategy 27UNIT 12

Knowledge Management 37

UNIT 13

Innovation 58

Case Studies 82


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Advanced Strategic Management MBA

Documents

Advanced Strategic Management MBA